House prices and the last crash...

WE were all listening to Yazz And The Plastic Population. They were riding high in the charts with The Only Way Is Up. And we clearly believed it.

The summer of 1988 was drawing to a close and house prices were booming as never before - more than one-third up on the previous 12 months.

And the message delivered by the bottle-blonde singer had apparently been taken to heart by the gurus of the housing market. Yes, there were one or two Jeremiahs who said the boom was bound to end in tears, but those at the heart of the sector - mortgage lenders, estate agents, surveyors - seemed adamant that none of us should fear a crash.

Trevor Kent, who had recently been elected president of the National Association of Estate Agents, led the charge against the doom-mongers. 'I am prepared to stick my neck out,' he said. 'In the next 12 months, house prices will rise by between 12% and 15%. The market is strong.'

Brian Whitfield, general manager of the Nationwide Anglia building society, conceded only that 'the market is set to cool'. He thought that prices would rise by ten to 15% in 1989.

The Royal Institution of Chartered Surveyors went as far as to admit that the London market was looking sticky, but there was no evidence that prices were falling.

And as the year drew to a close, the Halifax - then still a building society - predicted that prices in 1989 would rise by 10%.

Now fast-forward to April 2004. Again, house prices have boomed - the only argument is over the scale of the increase, with Nationwide putting the figure for the past year at 16.7% and Halifax reporting 18.5%.

And again, there are doom-mongers predicting a crash. Fund manager Tony Dye, who correctly warned that the stock market's bull run of the late Nineties could not last, believes house prices could fall 30% over five years. The International Monetary Fund is also worried.

But - just as in 1988 - those at the heart of the housing market remain sanguine. Melfyn Williams, president of the National Association of Estate Agents, said this month: 'Reports of an imminent crash in the market have just as much foundation as a house built on sand. These commentators are totally detached from reality.'

Nationwide predicts the market will rise by 15% this year. In December, Halifax forecast an increase of 8% over 2004 and expects to raise its target in a couple of months. According to Rightmove, a new arrival on the forecasting scene since the last boom, 'there's no likelihood of a collapse in prices'.

They may all be right. Life is different now and mortgage interest rates are less than half the 1988 level. But the similarity between the housing market predictions then and the forecasts now is striking. Indeed, they are virtually identical. No one connected with the house-buying or mortgage-lending industries appears to accept the possibility that if the market turns, it might turn suddenly and dramatically.

But with house prices, confidence is all. Look at what happened in the months after Yazz told us 16 years ago that the only way was up. For a short while, it appeared she might indeed be right - house prices did continue to rise. They climbed into the new year and in May 1989, according to the Halifax, they reached a peak. The average home that month cost £70,246.

Then began a slow, but steady and prolonged decline. By April 1992, the average had dropped below £65,000. Only in July 1995 was the bottom reached. The average price that month was just under £62,000.

And it took until 1998 for average prices to climb back to their 1989 level of £70,000. Mr Bad Timing, the man who bought a typical home at the top of the market, was forced to wait almost nine years to see the money value of his house restored.

At first glance, the decline from the 1989 peak to the 1995 trough - 13.2% - seems modest. And recovery gathered pace in 1996.

But that ignores the economic background - in particular, general inflation. The purchasing power of the £70,000 spent by Mr Bad Timing in 1989 and recouped in 1998 after housing recovered, had in the meantime been eroded by 28% - almost £20,000. In real terms, his 'investment' in a house was still showing a big loss.

Astonishingly, he had to hold on to this house and wait until June 2002 before he was back to square one. Only then was his house, in real terms, worth as much as he paid for it in 1989.

Inflation in the whole economy in the late Eighties and early Nineties disguised the full extent of the underlying fall in house prices. In real terms, they declined nearly 34% from their 1989 peak to 1995 trough.

Indeed, for decades, inflation has clouded our view of housing as an investment. Since 1956, house prices have outstripped price rises in the economy as a whole by little more than two% a year.

Yazz was wrong in 1988 to say the only way was up. Building societies and estate agents were wrong, too. Homeowners must hope that this time, the experts are not making the same mistake.